A few good answers to accounting questions from nonprofits

We’ve been compiling accounting related questions and reached out to Adam Watson, CPA. Here are his responses.

Q: Twice this month I’ve been in meetings with a board who said they don’t consider grants as operating dollars. How can that be if grants include operating dollars?

A: I’ve volunteered and worked with many nonprofits that receive grant dollars, and I’ve never thought of them as anything other than operating unless they were specifically designated to a project that didn’t include regular operations at all. Depending on the nature of the grant, I don’t always count on them as recurring when it comes to budgeting or strategic planning. I think it’s a good idea to delineate funding sources into categories such as grants, sponsorships, contributions, program revenue, etc. It’s good for a nonprofit to understand their funding streams and ensure they are not too reliant on any one stream.

Q: When is QuickBooks no longer viable for a nonprofit?

A: I’m a proponent of QuickBooks. So I don’t know that I have a scenario where I’d say it’s no longer viable. There is a more expensive version of QuickBooks (Enterprise edition) that might be more appropriate depending on the size of the organization, but that’s just a scale issue. That being said, I don’t view QuickBooks as a fully integrated donor management system. Most of the organizations I’ve had experience with will use some kind of external donor management software either independently or integrated into QuickBooks. I’m certainly open to the idea of a software suite that might provide efficiencies with a more all-encompassing nonprofit focus.

Q: What do you think about a board referring to and thinking about their programs as profit centers?

A: QuickBooks has a class tracking function, which I often hear referred to interchangeably as profit centers. We use this feature for a lot of our nonprofits. Many nonprofits find it helpful both internally to have an idea of income and expenses that are program specific for management analysis, and externally to help make the case for program-specific needs. I know there are judgment allocations (occupancy, utilities, staffing in a lot of cases), so it’s not generally perfect, but if done properly it’s still a good tool for decision making.

But those decisions must be in the larger context of the organization as a whole — not just the program on an island. For instance, I have served on a board that offers a program which operates at a deficit. The organization as a whole can absorb the loss and the program itself advances the mission of the organization. Knowing the program operates at a loss provides the incentive for other fundraising or sponsorship opportunities, and to limit wildly expanding the program to an unsustainable level. However, this knowledge doesn’t jeopardize the existence of the program because of the qualitative value it offers to the overall agency mission.

Q: For a nonprofit with varied operational costs, is there a concern if members purchase needed items and get reimbursed versus having accounts with various businesses? Or is a purchase credit card a better way?

A: From an accounting point of view, it's much easier to have a card than to process reimbursements. Just make sure the cards have appropriate spending limits and staff are educated on policies and procedures for use. This also requires oversight to see those policies are being followed and receipts are being turned in with the appropriate coding and approval.

Q: I’m on a board of directors of a nonprofit with an operating budget of $230,000. We’re trying to decide when it’s time to start requiring an annual audit. What do you think?

A: An audit is a big financial step for an organization to take. That being said, the Board has a fiduciary responsibility to ensure the fiscal viability of the organization. This should be done through oversight of financial policies, careful review of financial statements in comparison to budgets and/or historical performance, and open discussion. An audit is a supplement to these activities, not a replacement for them. If the organization has a strong Treasurer/finance committee in place, and the Board has a good understanding of its role, I would be hesitant to require an audit until completely necessary — either by statute (federal or state depending on funding sources and/or size) or from specific grant requirements.

Adam Watson, CPA, is a partner with Watson & Associates, a firm that providesfull- service accounting and bookkeeping services to businesses and nonprofits. Notes on Nonprofits is a collaborative column written and edited by Alyce Lee Stansbury, CFRE, President of Stansbury Consulting and Kelly Otte, MPA, Executive Director of PACE Center for Girls, Leon County.